Weak MN banks lost ground in Q3

Despite continued profitability for most Twin Cities lenders, conditions at some of the riskiest banks worsened in the third quarter.

That’s according to an analysis of new Federal Deposit Insurance Corp. data that shows profits for 71 percent of the Minneapolis/St. Paul metropolitan area’s banks through Sept. 30, but deteriorating conditions at the banks with the least capital.

The most noteworthy shift was at Forest Lake-based Patriot Bank, where the Tier 1 leverage ratio (also known as a core capital ratio) dropped from 2.65 percent at the end of June to 1.85 percent at the end of September on a $1.02 million quarterly loss.

Regulators normally consider a bank well-capitalized if that ratio is above 5 percent and undercapitalized if below 4 percent. A core capital ratio below 2 percent is a sign that the bank may soon face involuntary closure, though regulators have shown more patience recently as banking conditions slowly improve.

Patriot Bank is under a September 2010 FDIC order that requires it to maintain a core capital ratio of at least 9 percent, among other directives. Patriot President and CEO John Milbauer could not be reached for comment.

Bloomington-based First Commercial Bank’s core capital ratio fell into undercapitalized territory, from 4.01 percent last quarter to 3.1 percent in the third quarter, as it lost $2.56 million.

First Commercial has reported losses of nearly $9 million in 2011 to date, and could lose more than any bank in the state by the end of the year. Bank officials declined comment through a spokesman.

Edina-based Crown Bank had its worst third quarter ever, losing $3.38 million since July on top of the bank’s $3.34 million first-half losses. The bank remained well-capitalized with a $2 million cash infusion from holding company Crown Bankshares Inc.

CEO Peter Dahl blamed customer bankruptcies and bad loans for the bank’s losses and said he believes the bank has identified the riskiest parts of its portfolio.

“We hope to go through the portfolio with a fine-tooth comb to put it behind us,” Dahl said, adding that the bank is projecting a $400,000 profit for the last three months of the year.

St. Paul-based Western Bank made $1.85 million this quarter as business boomed for several customers in the service, retail, manufacturing and distribution industries, President and CEO Tony Lemaire said.

Clearer skies

Bankers were hoping for better economic news this past quarter. Employment and economic growth was still too slow to drive new business, but credit quality improved at the banks and surprise loan losses were less common.

“The pool of problems seems to be shrinking at a nice, steady pace,” Lemaire said. “The worst of the worst have worked themselves out.”

There’s even optimism at the banks that are losing money. Baldwin, Wis.-based First Bank of Baldwin, a well-capitalized commercial lender still wrangling with its commercial real estate portfolio, lost $3.24 million in the first three quarters, but is trying to increase earnings with expense reductions and fee increases.

The first nine months of the year brought more business to the bank’s construction and manufacturing customers, said Steven Perry, who replaced retired CEO and President Jon Mentink on Sept. 1.

It’s too early to know whether that business is evidence of a strengthening economy or just pent-up demand, but Perry called the rebound “promising.”

Industry watchers expect banks to slowly get healthier, but not bigger, turning to cost reductions to drive earnings in the absence of strong loan demand.

“The good news is, we’re not in a recession. The bad news is, we’re not very far out and we’re not putting much open water between us and the recession,” said bank analyst Ben Crabtree of Oak Ridge Financial in Golden Valley.

Loan demand remained weak in the third quarter and increased earnings showed “some improvement, but not rockets,” said Ron Feldman, senior vice president for supervision, regulation and credit at the Federal Reserve Bank of Minneapolis.

Feldman hopes to see more organic growth through existing loans and lines of credit, since new-loan customers are usually just switching lenders, which only ends up being “a redistribution of the pie from weaker small banks to the larger banks.”

Supervisory ratings are improving at the Midwestern banks watched by the Minneapolis Fed. Even if the overall rating of a bank doesn’t improve, they’re getting stronger on individual parts of their exams.

“We’re seeing more of that over the last three months, six months, than we had before. That’s a little bit slow. You don’t see huge increases all at once, but that’s going to accrete back to decent conditions,” Feldman said. “It’s not overwhelming. I don’t want to overstate it. It’s very slow.”